After a 4 hour drive for due diligence on a park I was looking to invest… I am left asking myself why any park owner would allow their POHs to disintegrate into such awful condition. The numbers lined up for a true 10% CAP with a proforma north of 15%… so I was excited to get moving on a deal. The condition of the rentals leaves me just dumbfounded. The current owner purchased in 2006 and could have doubled his money… if he just took care of his assets. It was a long drive home…
Trailer park owners will squeeze every last nickel they can out of POH’s, and the tenants they get will reflect that. This will definitely be a turnaround park.
Your valuation of the park should only consider the lot rent and no home rent to come to your capitalization rate. Park owners love to ask for money for home rental value even though you as Buyer have no intention of having any POH’s. Hopefully your 10% CAP reflects this, otherwise the deal is already overvalued. The value of crappy homes like this is zero, maybe even less if you are forced to haul them off.
If you do acquire the Park you will have to decide what to do with these homes: 1) fix them up and sell them; 2) give them to the tenants and give them 6 months to fix them up (assuming they are good tenants); or 3) haul them away.
You are absolutely correct and that is exactly how the transaction went down or ‘burned’ down. He originally was asking 255k but got him to 160-170k by explaining my CAP requirements. All was looking good on paper; ready to go; financing lined up… then went to do my due diligence walk. After the walk had to advise that we could not take the POHs and he could keep, sell or give away (with stipulations). Revalued the park into the low 70s. End of conversation it appears…
The tragedy lies in that he purchased in 2006 for 79k. Had he simply maintained the POHs in reasonable condition he would have more than doubled his money in selling to me. He would have done well and I would have picked up a nice little park.
We take very, very good care of our POHs in our other parks. Just reaffirms my thoughts.
Taking care of business costs money. Trailer park owners are only interested in the bottom line and with expenses eating into that number the less they do the better. This is the primary difference between purchasing a “trailer park” and a MHC. As offensive as the term is they are basically slum landlords. There is a place for them in the rental business but it is clearly a different arm of the business.
Quality comes at a price the same as targeting city water and sewer over well and septic.
@Propboy40 who is your lender? I have a $300,000 park lined up but having a heck of a time finding a lender for such a small amount!